Automatic Tax Cuts Threaten State Budgets

States are finding themselves at the mercy of automatic tax cuts as the consequences of years-old tax policies take aim at state budgets. Budget writers and analysts in several states have begun to raise the alarm about “triggered” tax cuts enacted in recent years — measures once tucked away in the fine print that are now forcing governors and legislators to scramble as revenue growth begins to slow.

In 2021, Louisiana voters approved a tax plan that combined a reduction in personal income tax rates with the end of a costly federal tax deduction. While this move was initially considered revenue neutral, the law also included provisions for automatic personal and corporate income tax cuts in the future. Starting next year, if certain conditions are met — such as reaching a specific rainy day fund balance and revenue growth target — these tax cuts will be triggered at an uncertain cost to the state. At the time of the 2021 tax reforms, Louisiana’s state economists and fiscal analysts refrained from even estimating the eventual cost of the triggered cuts, citing the unpredictability of future revenues. It now looks like the state is on track to trigger an across-the-board income tax cut that would gut revenues by $200 million to $400 million a year, even if additional tax cuts currently on the table don’t come to fruition.

Other states are also grappling with the repercussions of triggered tax cuts. West Virginia is on track for an automatic 4 percent income tax cut in 2025, due to trigger provisions included in the state’s massive 2022 tax cut plan, and is now cutting further through legislation adopted during a special legislative session that just adjourned. Kentucky policymakers, who passed legislation that same year to phase out personal income taxes entirely, are already having to admit that the state’s current financial outlook makes such plans untenable. And in Colorado, financial experts are warning about tight times ahead due, in part, to a series of triggered tax cuts on the horizon required by that state’s harmful set of tax and budget limits.

Such phased-in cuts, often presented as a more fiscally responsible approach, simply obscure their long-term costs. By 2028, we estimate that the annual price tag from the 2021-2023 wave of state tax cuts could grow to around $30 billion nationwide. Many of these cuts were designed to take effect gradually; for example, Pennsylvania’s 2022 decision to cut its corporate income tax in half over eight years means the state will see annual costs soar from $127 million in 2023 to nearly $1 billion by 2028. This approach allows current policymakers to avoid both spending cuts and increases in more regressive revenue sources, such as sales tax, needed to pay for prior income tax cuts. However, it also pushes the financial burden onto future administrations, potentially limiting funding for critical services like education and health care.

Not to mention the fact that it also undermines democratic accountability. By drawing out the implementation of deep income tax cuts, policymakers can punt their full cost — and harm — many years down the road, effectively making them someone else’s problem. In Michigan, for instance, tax rates automatically fell in 2023 due a triggered tax cut passed in 2015, when none of that state’s current legislators were even in office.

As these tax cuts take hold, states face shrinking revenues, making it harder to invest in key areas that directly impact families and communities. The bill for these cuts is coming due, and states must now confront the reality of their financial decisions. To protect vital services, policymakers should reconsider these automatic cuts and prioritize revenue solutions that address long-term needs.